Whether a worker is an employee or an independent contractor affects your business’s tax liability and its exposure to liability for that worker’s actions. Accordingly, it is important that your business establish an understanding of what factors differentiate an employee from an independent contractor.
Generally, your business must withhold income taxes, withhold and pay Social Security and Medicare taxes, and pay unemployment tax on wages paid to an employee. Conversely, your business does not generally have to pay any taxes on payments to independent contractors. To determine whether a worker is an employee or an independent contractor, the IRS looks at three primary questions:
- Does the company control and/or have the right to control the manner in which the worker performs his or her job?
- Does the company control the financial aspects of the worker’s job? (i.e. reimbursement for expenses, tools, and training, determine the manner in which worker is paid, training, etc.)
- What is the nature of the relationship? (i.e. ongoing as compared to “one job”, benefits provided, insurance provided, etc.)
To help determine the answers to these questions, the IRS considers factors including, but not limited to, the following:
- How does the worker receive work assignments?
- Who determines how work is performed?
- Does the company require specific training?
- Is the worker free to work on other jobs and determine his or her schedule?
- Is the worker reimbursed for expenses or tools of the trade?
- Does the company provide any benefits or insurance to the worker?
- Who pays taxes attributable to the worker’s relationship with the company?
- Does the worker provide his or her own office, and does he or she cover all expenses for such office?
- Does the company affect the worker’s realization of profit or loss?
- Does the worker have employees? If so, who pays them and controls their work?
For more discussion of these factors and their effect on the employee/independent contractor distinction, please visit the IRS website at http://www.irs.gov/, and type “independent contractor or employee” in the search box.
Your business is much more likely to be held accountable for the actions of an employee than those of an independent contractor. It is a well-accepted general rule that the company is not liable for injuries resulting from the negligence of an independent contractor, but is liable for injuries resulting from the negligence of an employee. When considering these questions, the primary factor courts consider is whether or not the company retains some degree of control over the manner in which the work is done. To avoid exposure to increased liability, your business must consider these factors when defining its business relationships.
We strongly recommend tailoring an independent contractor agreement to your business and the business relationship you are trying to establish. In doing so, your business will establish the grounds for the relationship at its outset and help avoid the pitfalls of mischaracterization.
Please contact our office for assistance with your independent contractor relations, or with regard to any other legal matters.